Does An Offer In Compromise Survive A Taxpayer’s Death?

Today we will discuss offers in compromise:

§ 301.7122-1 Compromises.

(e) Acceptance of an offer to compromise a tax liability.

(1) An offer to compromise has not been accepted until the IRS issues a written notification of acceptance to the taxpayer or the taxpayer's representative.

Let’s talk about Jacqueline Farwell.

She had gotten herself into a tax mess for years 2008 through 2011, 2013 and 2015. The IRS had recorded a lien for almost $120 grand.

 She was deep into medical care and quickly burning thorough cash. She requested a CDP hearing and proposed an offer in compromise for $100.

COMMENT: We are so accustomed to the pennies-on-the dollar nonsense on radio and late-night television that we forget that real offers exist. Take an elderly person with diminishing assets, severe expenses, minimal or no likelihood to earn again and the IRS might accept $100. What the IRS won’t accept is a 40-something skipjack with plenty of earning power but an impaired sense of personal responsibility.

In February 2020 the IRS examiner requested updated financial information.

Farwell died in March 2020.

Nobody said anything.

In April 2020 the examiner told Farwell’s attorney that she advised accepting the offer.

Nobody said anything.

In September 2020 the IRS sent a letter that it had accepted the offer.

Nobody said anything.

Mind you, the IRS did not realize that Farwell was dead.

COMMENT: There may be reasons why the estate stalled - perhaps disagreement among the heirs, a delay in hiring lawyers, deciding who would have tax power of attorney. Still, it is … odd. I can see the IRS feeling manipulated.

In November 2020 the IRS realized her death and pulled the offer.

The estate asked Appeals to reinstate the offer. The IRS refused, arguing that mutual mistakes – not telling the IRS, for example - were made.

Off to Tax Court they went.

Our question is: does an offer in compromise survive the death of the taxpayer who requested it?

The estate argued that Regulations prevented the IRS from reopening the matter unless there was false information, concealment, or mutual mistake. The estate had that September letter and had no intention of giving it back.

COMMENT: Partially true. The IRS was prevented from reopening in the event there had been offer and acceptance.

The Code is not clear what happens when the taxpayer dies before acceptance. The Internal Revenue Manual however is.

5.8.7.5 (04-24-2025)

Termination of Consideration

1.      Consideration of an offer must be terminated upon the death of a single proponent. See IRM 5.8.10.4, Deceased Taxpayers and Estates. The date of termination is the taxpayer's date of death and the date used for the TC 482. If the taxpayer’s date of death is prior to the offer submission, refer to IRM 5.8.10.4.1, Death of a Taxpayer. Offers that are terminated do not receive appeal rights. See IRM 5.8.10.4.1, Death of a Taxpayer, for instructions on actions to take when advised that one party to a joint offer has died.

The estate was not impressed. The Internal Revenue Manual does not have the force of law, it hissed.

True, noted the Court, but it was in line with the statute and Regulations.

But we have a letter from the IRS accepting the compromise, the attorney whinged.

The letter was sent in error - one the estate contributed to - and the IRS was not bound by the error.

The attorney returned to the mutual mistake exception, arguing that mutual mistake was impossible as one of the parties was deceased.

The IRS repeated: look at Section 7122. An offer has to be accepted. Any extant powers expired when Farwell died, and there was a period after the death before an attorney was hired and a new power filed. A dead person cannot accept.

The IRS knew about Farwell’s terminal illness. You are accomplice to this, the attorney shrilled.

Methinks the attorney was losing it.

The IRS pointed out the obvious: have the estate submit its own offer in compromise. Farwell’s individual offer would wrap up, and the two sides could move to the estate’s offer. There is a whiff of common sense here ….

NO!! bayed the attorney.

Why? I presume that assets remained in the estate. Enough assets that the estate did not want to part with them.

Let’s return to Section 7122 at the top of this blog.

Requirement one: was there a written notice?

Maybe, possibly, perhaps that September letter, although one would be hard-pressed to argue that it had been sent to taxpayer’s representative.

Requirement two: was there acceptance of said notice?

No. Farwell had passed away. The estate had not yet named a new power. There was no one who could represent the estate at that instance.

The IRS won.

Our case this time was Estate of Jacqueline R. Farwell, U.S. Tax Court, No. 11555-22L, T.C. Memo 2026-95.

Identity Theft and A Tax Deficiency

 

To me it reads like a nightmare.

Brendan Bettis wanted to file his 2022 tax return. He had worked in 2021 for several employers, including Federal Express, DoorDash and Instacart. In April 2023 he saw a social media post recommending a tax preparer. Bettis called the phone number.

He spoke with someone. She instructed him to provide further information, including his W-2s, Forms 1099, social security number and bank account information through an online portal.

He - of course - heard nothing back for months.

COMMENT: I may be betraying my age, but hiring a professional sight unseen and through a website is unacceptable. Sending confidential information is less so. Even working among CPAs, I have known practitioners which I would not personally use and which I could not refer. To be fair, though, I suspect this one was a professional as much as I am a deep-sea diver.

In April 2023 she filed a 2022 Form 1040 reflecting Bettis’ name and social security number.

He did not know about it, much less authorize it. The return was signed by a Ms. Victoria Jackson of Cypress, Texas. Bettis never met her in person.

The return did show the W-2s, but then it became a work of fiction. It showed Bettis’ occupation as “landscaping,” as well as household wages of $21,108. The return also claimed a fuel tax credit of $23,790 for the off-highway use of 130,000 gallons of gasoline. I presume that is how and why “landscaping” entered the story.

At 130,000 gallons Bettis might as well have been installing a pipeline.

I suppose he was getting a surprise tax refund.

Nope.

Ms. Jackson, or someone in her employ, wanted to receive a “refund product.” This means that Jackson and/or her firm would receive some/all of the refund. The refund was to be sent to a bank Bettis did not know.

The IRS processed the return in June 2023.

It made three adjustments:

• The IRS applied $5,561 of the refund to offset Bettis’ 2015 tax liability.
• It next used $1,077 to offset his remaining 2018 tax liability.
• It then used the remainder of the refund to satisfy Bettis’ past-due child support.

Ms. Jackson – or someone in her employ – was furious. She/they demanded that Bettis pay his tax preparation fee.

Righhttt.

Eventually the IRS figured it out. In May 2025 the IRS sent Bettis a Notice of Deficiency for $24,780.

Which is how we got into Tax Court.

The IRS and Bettis agreed that the correct tax was $1,263. The court case was about the difference - $23,517.

And the key was the tax definition of the word “deficiency.”

26 U.S. Code § 6211 - Definition of a deficiency

(a) In general For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44 the term “deficiency” means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of—

(1) the sum of

(A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus

(B) the amounts previously assessed (or collected without assessment) as a deficiency, over—

(2) the amount of rebates, as defined in subsection (b)(2), made. 

(b) Rules for application of subsection (a) For purposes of this section—

(1) The tax imposed by subtitle A and the tax shown on the return shall both be determined without regard to payments on account of estimated tax, without regard to the credit under section 31, without regard to the credit under section 33, and without regard to any credits resulting from the collection of amounts assessed under section 6851 or 6852 (relating to termination assessments).

(2) The term “rebate” means so much of an abatement, credit, refund, or other repayment, as was made on the ground that the tax imposed by subtitle A or B or chapter 41, 42, 43, or 44 was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.  

The IRS came in hot. The fuel tax credit was the “rebate” referred to in Section 6211(b)(2). A rebate increases a deficiency (via the arithmetic of 6211(a)(2). Give me my money, said the IRS.

The Tax Court was not persuaded.

The Court reasoned that – before a 6211(b)(2) argument could be made – a Section 6211(a)(1)(A) argument must be made: the amount shown as tax by the taxpayer on his return.

Issue: Bettis was scammed. He never filed an authorized return. No real tax return was filed meaning no real tax was shown by the taxpayer on his return.

The IRS could not get past Section 6211(a)(1)(A) to get to the Section 6211(b)(2) it wanted.

The Court explained its reasoning:

• A fraudster obtains confidential information and files a false return seeking a refund to the fraudster’s bank account.
• The taxpayer has no idea. In fact, taxpayer does not even have to file a return.
• The IRS issues the refund.
• The IRS catches its mistake. It wants its money back from the defrauded taxpayer.

Nope. Can’t. What we have just described does not rise to the level of a “deficiency” that the IRS can pursue against the taxpayer.

The Court decided that the correct deficiency was $1,263, to which both sides had previously agreed.

Our case this time was Bettis v Commissioner, US Tax Court, Docket No. 6560-25S, dtd 9.25.26

BMW’s $38.4 Million Tax Refund Claim

 

I had a partner who would likely snap if you mentioned a superseding tax return.

We had one go south. We electronically filed an individual tax return before April 15^th. We then learned that the return had omitted a significant transaction. Many tax practitioners would file an amended return after April 15 and square up with the IRS at that time. Since there was still time before April 15 and the dollars were enough to draw a significant penalty – and I have a big mouth – we decided to file a superseding return instead.

It did not go well. The IRS got surprised with the superseding, as it received a second return which was not marked “amended.” The IRS was paralyzed and assumed a filing mistake. The taxpayer had sent a check, which the IRS of course refunded. We had the client void and return the check, as taxes were due when the dust eventually settled. We could not resolve the matter administratively and wound up in Appeals. The issue was eventually resolved, but at needless time and cost – and a practitioner who may have forsworn superseding returns for the remainder of his career.

I am now looking at a case involving a $38.4 million tax refund and a superseding return.

With the above story as background, let’s start.

The case involves BMW US, itself a subsidiary of BMW AG (the German parent).

• The 2019 BMW US return was due April 15, 2020 and extended to October 15, 2020.

• BMW US filed its 2019 corporate (Form 1120) tax return on September 15, 2020.

• On October 14, 2020, BMW US filed a 2019 superseding Form 1120.

• On October 13, 2023 BMW US filed an amended 2019 return requesting a refund of $38,436,000.

COMMENT:  A C corporation return (such as the BMW US Form 1120) is initially due 3 and ½ months after year-end. For a calendar year-end return, that initial due date would be April 15. An extension is available for six months, making the extended due date October 15. A superseding return – by definition – must be filed on or before the due date (original or extended) of the return. We can see what BMW US was doing: it filed a 2019 superseding return on October 14, 2020 – one day before the extended due date. Had BMW US filed on October 16, it would have needed to file an amended return, as it would have been one day too late to file a superseding.

Let’s talk about superseding returns in general. To be fair, you can have a long and prosperous tax career and never file a superseding. Like so much of tax practice, it depends on your clients and what they get themselves into.

Think of a superseding return as a do-over. There is something on the initially-filed return that you want to change, and an amended return will not work (or work as well). There are elections, for example, that cannot be made on an amended return. A BBA partnership comes to mind. One does not amend a BBA partnership (unless one is able to elect out) the same way as other tax returns. There instead are special procedures - called the administrative adjustment request (AAR) process - which require IRS permission and which you must follow. I elect out of BBA for my partnerships whenever possible, as the AAR process is a pain.

The superseding - while its requirements are strict – steps into and takes the place of the initially-filed return.

Tax returns fall into three categories:

• Initial returns

• Superseding returns

• Amended returns

Initial and superseding returns filed before April 15 are deemed filed on April 15. The statute of limitations period begins on April 15.

Returns filed after April 15 but within a valid extension period are treated as filed on the date received by the IRS. The statute of limitations period begins on the date received.

Amended returns received after the valid extension period must be received within the statute of limitations period.

What happened to prompt BMW US to file a superseding?

On September 21, 2020 the IRS issued new Regulations addressing changes to depreciation under Section 168. More specifically, the changes were taxpayer-friendly, and BMW US wanted the new depreciation expense.

The Court found itself facing a new issue: when does the statute of limitations for refunds start when both initial and superseding returns are timely filed within an extension period?

The BMW US case went before the U.S. Federal Court of Claims.

The IRS position was straightforward:

• The initial 2019 return was due April 15, 2020.

• The 2019 return was extended to October 15, 2020.

• The return was filed on September 15, 2020. This is the initial return and begins the Section 6511 statute of limitations period for refunds.

• A superseding return was filed on October 14, 2020.        

• An amended return was filed October 13, 2023. This filing was outside the statute of limitations period, which started September 15, 2020 and expired September 15, 2023.

Code § 6511 - Limitations on credit or refund

(a) Period of limitation on filing claim

Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid.

(b) Limitation on allowance of credits and refunds

(1) Filing of claim within prescribed period

No credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in subsection (a) for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.

The IRS cited two Supreme Court decisions on its side: Zellerbach and National Paper Products. Those decisions however involved Section 6501, which is the statute of limitations for IRS assessment.

Code § 6501 - Limitations on assessment and collection

              (a) General rule

Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).

The Supreme Court reasoned that a second return acts as an amendment or supplement to the initially-filed return. What it did not do is toll a limitation (referring to Section 6501) which has already begun to run.

BMW US fired back:

• This is not a case involving Section 6501 (the statute of limitations for the IRS to assess tax). Rather it is a case involving Section 6511 (the statute of limitations for the IRS to issue refunds).

• That being so, reliance on Zellerbach and National Paper Products is misplaced.

• The court should rely instead on Haggar, which dates back to the era of excess-profit tax. Capital stock was included in the calculation of excess profit, and once that value was declared it could not be changed. Whether a superseding took the place of an initially-filed would have meant something. 

• In Haggar the taxpayer whiffed on the calculation of capital stock. Before the due date it filed a superseding return. The IRS refused to accept it. The case went to the Supreme Court, which reasoned with the concept of a “first return.” It decided that the superseding was a first return, and Haggar won its case.

• Relying on Haggar, the Section 6511 limitations period began on October 14, 2020, when the superseding return - that is, the “first return” - was filed.

• This would make the amended return (October 13, 2023) timely filed. 

The Court observed:

The parties have found no directly analogous precedent for determining the operative trigger to start the statute of limitations when the IRS provided a taxpayer with an extension, and both the initial and superseding returns are filed before that extended deadline.”

I agree. I do not remember ever seeing this fact pattern in my career.

The Court philosophized: there can only be one “initial” return.

The Court reasoned that both Zellerbach, National Paper Products, and Haggar could be read together without inconsistency. Haggar addressed the substance of the return, its elections and disclosures.  Zellerbach and National Paper Products instead addressed the Section 6501 statute of limitations. They were addressing different issues, so the decisions do not contradict.

BMW US noted that Zellerbach and National Paper Products were Section 6501 cases. This was not a Section 6501 case. It was instead a Section 6511 case. The two Sections could – depending on their drafting - yield different results, as the use of Section 6501 reasoning might not apply to a Section 6511 case.  

The Court was concerned that BMW US’ argument would whipsaw the IRS. A taxpayer could reset the three-year period for a refund under Section 6511 by timely filing a superseding return, whereas the IRS would have to use the initially-filed return for the three-year assessment period under Section 6501.

COMMENT: True, but if that is how Congress drafted it then Congress would have to change the law.

The Court decided that it would apply Zellerbach and National Paper Products to Section 6511, making BMW US’ $38.4 million refund request untimely. Except …

… there is another case in the works that might affect this decision.

It is the Kwong case. It comes out of the COVID era, when the IRS postponed numerous filing and payment deadlines.

These postponements are called “tolling” in tax jargon. Let’s say that you have 12 months to file something, but for whatever reason there is a toll of three months. You now have 15 months to file that something.

The Court called intermission on BMW US pending Kwong.

BMW US may yet have game.

Our case this time was BMW (US) Holding Corporation and Subsidiaries v United States, US Court of Federal Claims, No. 1:25-cv-01984.